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VoIP in the Crosshairs

March 1, 2004 By

There's little question voice over Internet protocol (VoIP) is mature enough to be a communications option in the mass market. Now states are confronting the issue of regulating new services that straddle the line between Internet information and traditional telephone service.

VoIP was once considered too unreliable for voice communications. But in late 2003, several cable television powerhouses -- including Cablevision, Time Warner Cable and Comcast -- said they were prepared to offer Internet-based telephone services to their cable customers. Traditional telecom heavyweights, such as AT&T, also jumped into the VoIP market, using DSL as a delivery mechanism.

No matter the medium, VoIP will likely attract customers interested in bundled services from telecom providers. As VoIP providers gain momentum, battles over states' regulatory reach have begun. On one side, state public utilities commissions (PUC) argue VoIP providers do business as telephone companies, so they should be subject to the same regulatory fees and rules as traditional phone companies.

On the other hand, VoIP providers contend they provide information services, not telecommunications services, and don't fit under PUC regulatory schemes. So far, their argument is winning. VoIP providers prevailed in one case against a state PUC, and the FCC appears to be leaning toward little regulation.

At stake are hundreds of thousands of dollars in fees to state PUCs and the threat of stifling technology that may revolutionize telecommunications, according to some participants.

First Salvos

Last August, Minnesota's PUC declared that VoIP was subject to the same rules and regulations that govern traditional telephone service. The PUC targeted Vonage, one of the nation's biggest VoIP providers, ordering the company to obtain business licenses similar to those required for traditional phone companies, and to immediately start paying fees to the Minnesota Department of Administration to support 911 services.

Vonage challenged the ruling, and in early October, a Minneapolis federal judge sided with the company, barring the PUC from forcing the firm to abide by traditional telephone regulations. The PUC didn't appeal and concluded its proceedings against Vonage a few days after the ruling.

Still, the Minnesota PUC's defeat didn't deter Wisconsin and California PUCs from announcing their intent to regulate VoIP providers.

In September 2003, Wisconsin's Public Service Commission (PSC) told California-based VoIP provider 8x8 the company couldn't provide VoIP services in Wisconsin without the PSC's approval, and declared the company's bills for voice calls in the state void. Wisconsin sent similar letters to other VoIP providers, a PSC spokeswoman said.

"Currently staff is in a fact-finding stage on the issue of VoIP," said Linda Barth, the Wisconsin PSC's public information officer, in mid-December. "It is staff's intent to continue to collect information on VoIP and to monitor FCC activities. We are not at a point in our process to make further comments about regulation of VoIP."

In a letter dated Sept. 22, 2003, California's PUC told Vonage to obtain a telephone operator's business license by the end of October. The agency sent the same letter to five other VoIP providers.

"Section 234 of the California Public Utilities Code defines a telephone corporation as every corporation or person who owns, controls or manages a telephone line for profit," the California PUC's letter said. "Section 233 defines a telephone line as any asset used to facilitate telephone communication. Section 216 states that any telephone corporation that performs compensated service to any portion of the California public is a public utility. Section 1,001 requires that a telephone corporation must first be certificated by the commission to place a telephone line into service."

Defending Their Turf

Matt Deatrick, vice president of retail sales for Vonage, said the traditional regulatory approach simply doesn't work in today's world. He contended that Vonage delivers data services, not telecommunications services because the company doesn't terminate

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